As of 1 January 2024, the European Union (“EU”) Emissions Trading System (“ETS”) has expanded its scope to include the maritime sector. This is a pivotal moment for vessel owners, financiers, and charterers to understand the implications and requirements of this regulatory framework. Here are five essential points to keep in mind regarding the EU ETS in the maritime sector.
1. What is the EU ETS?
The EU ETS operates as a "cap-and-trade" mechanism aimed at reducing greenhouse gas emissions. It imposes a cap on emissions from various economic sectors, which is expressed in EU allowances (“EUAs”). This cap is gradually reduced each year to help the EU achieve a 55% reduction in greenhouse gas emissions by 2030 compared to 1990, with a target of climate neutrality by 2050.
Under the "polluter pays" principle, operators within the EU ETS must surrender EUAs equivalent to their emissions, which can be acquired through auctions or secondary markets. Heavy penalties are imposed for exceeding EUA limits.[1]
Since its inception, the EU ETS has expanded beyond its initial sectors, including aviation, and now encompasses maritime emissions.[2]
2. What is the implementation timeline of the EU ETS in the maritime sector?
The EU ETS now covers carbon dioxide emissions from all large ships (gross tonnage of 5,000 or more) arriving at or departing from EU and European Economic Area (“EEA”) ports, regardless of their flag or the place of incorporation of the shipowners.
Key points include:
- Voyages Within the EU/EEA: All emissions from voyages within EU/EEA waters and operations within ports are included. Essentially, the entirety of emissions from vessels either (i) conducting voyages within the EU and EEA or (ii) within a port of call[3] located in the EU or the EEA are to be taken into account.
- Partial Coverage: For voyages starting or ending at EU/EEA ports, 50% of emissions are counted.
- Future Expansions: From 1 January 2026, the EU ETS will also include methane (CH₄) and nitrous oxide (N₂O).
- Gradual Surrender Obligations: The EUA surrender obligations will be phased in gradually, increasing in scope from 40% of verified emissions in 2024 to 70% in 2025 and reaching 100% in 2026. The EUAs must be surrendered by 30 September of the year following the reporting year.
- Vessel Categories: The EU ETS initially applies to ships carrying cargo or passengers with a gross tonnage of 5,000 or more. From 1 January 2027, the coverage will extend to vessels of the same gross tonnage that are involved in offshore activities, such as oil and gas exploration and production.
3. Who holds compliance responsibility?
The responsibility for complying with EU ETS obligations rests with shipping companies.
Shipping company is defined as “the shipowner, or any other organisation or person, such as the manager or bareboat charterer that has assumed responsibility for the operation of the ship from the shipowner and that, on assuming such responsibility, has agreed to take over all the duties and responsibilities imposed by the International Management Code for the Safe Operation of Ships and for Pollution Prevention (the “ISM Code”), set out in Annex I to Regulation (EC) No 336/2006 of the European Parliament and of the Council”.
While the default responsibility for EU ETS compliance lies with the registered shipowner, this obligation can be delegated to the manager or bareboat charterer who has agreed to assume duties and responsibilities under the ISM Code (the “ISM Company”).
This delegation requires an agreement signed by both parties explicitly stating the delegation of responsibilities. It is recommended that the registered owner coordinates with the ISM Company if they consider it would be more appropriate for the latter to take on the EU ETS responsibilities.
Each shipping company covered by the EU ETS is associated to an EU member state as its administering authority as per the attribution list published on 31 January 2024 and annexed to the Commission Implementing Decision (EU) 2024/411. According to the Commission Implementing Regulation (EU) 2023/2599, shipping companies must furnish their associated administering authority with information on ships under its responsibility.
If the EU ETS obligations are taken on by an ISM Company, it should provide the administering authority with a document clearly indicating that it has been duly mandated by the shipowner to comply with the ETS obligations. In the absence of such documentation, the registered owner is considered responsible for the EU ETS obligation by default.
4. What are shipping companies’ obligations under the EU ETS?
- Opening a maritime operator holding account in the Union Registry
The purchase and surrender of EUAs and entry of emissions data are carried out through a maritime operator holding account (the “MOHA”) in the Union Registry. Shipping companies should apply to the national administrator of their associated administering authority and request to open a MOHA (i) within 40 working days of the publication of the attribution list or (ii) within 65 working days of the first port of call falling within the scope of the EU ETS if the shipping company is not included in that attribution list.
- Monitoring, reporting and verifying the emissions data
The monitoring, reporting and verification of greenhouse gas emissions is crucial for the effective operation of the EU ETS, and such obligations are set out in the Regulation (EU) 2015/757 of the European Parliament, as amended by the Regulation (EU) 2023/957 of the European Parliament and of the Council of 10 May 2023 amending Regulation (EU) 2015/757 (the “MRV Regulation”). The entities assuming the EU ETS obligations are also responsible for compliance with MRV obligations.
To ensure that the obligations under the MRV Regulation are met, the shipping companies shall submit a monitoring plan in respect of the ships falling within the scope of the MRV Regulation and the EU ETS to their respective administering authority via the THETIS-MRV system by 1 April 2024. For ships falling within such scope for the first time after 1 January 2024, the deadline is within three months after the ship’s first port of call in a port under the jurisdiction of an EU member state. The submitted monitoring plan should have been assessed as being in conformity with the MRV Regulation by an accredited verifier. As an ongoing obligation, shipping companies are required to monitor the emission level of their ships in accordance with the monitoring plan approved by the administering authority.
Commencing in 2025, shipping companies will need to submit an emissions report for each ship under their responsibilities on or before 31 March each year, covering the entire reporting period of the previous year, which must be verified as satisfactory by a verifier and submitted to the administering authority, the authorities of the flag states (if the ships are flying the flag of an EEA country) and the EU. Additionally, shipping companies will also be required to submit aggregated emissions data at company level by 31 March each year.
We will delve into the MRV obligations in greater detail in our other article on Fuel EU Maritime Regulation and MRV Regulation.
- Surrendering EUAs
The key EU ETS obligation of shipping companies is to surrender allowances corresponding to the emissions of the ships under their responsibility. Failure to do so will result in these companies facing a penalty of EUR 100 for each additional tonne of carbon dioxide equivalent. The penalised shipping companies remain liable for surrendering the required EUAs and their names will be disclosed to the public.
5. How to approach the drafting of an EU ETS clause in a charter?
To streamline cooperation between owners and ISM companies with respect to their EU ETS obligations, BIMCO has introduced the BIMCO ETSA Clause for Time Charter Parties 2022. This clause allocates costs and responsibilities for obtaining, transferring, and surrendering greenhouse gas emissions allowances for ships operating under the EU ETS among the shipowners and charterers.
The template clause is based on the premise that the party providing and paying for the fuel under the time charter is the party that is responsible for providing and paying for the EUAs, hence placing the responsibility on the charterers. Owners, on the other hand, are required to monitor the ship’s emissions and provide the relevant emissions data and the basis of calculations to the charterers, who should then transfer the appropriate allowances to the owners monthly.
While it is not mandatory to incorporate BIMCO ETSA Clause for Time Charter Parties 2022 into the charter or adopt the cost allocation mechanism in the BIMCO clause, it is advisable for the parties to clearly delineate in writing who is responsible for obtaining, transferring, and surrendering greenhouse gas emissions allowances, as well as liable for the associated costs.
Conclusion
By understanding these key elements of the EU ETS, maritime stakeholders can better prepare for compliance and navigate the evolving regulatory landscape. If you have further questions or need tailored legal advice, please do not hesitate to contact us.
Shipping companies that fail to surrender sufficient EUAs are subject to an emissions penalty of EUR 100 per tonne of carbon dioxide equivalent and remain liable for surrendering the required allowances. Failure to comply for two or more consecutive periods may result in the ships of the company being banned from entering the EU ports until the surrendering obligations are fulfilled.
The EU ETS was first implemented in 2005 and has undergone several updates and phases, including the inclusion of the aviation sector in 2012.
For the purposes of the EU ETS, a “port of call” means the port where a vessel stops to embark or disembark passengers or to load or unload cargo, and emissions from vessels within a port of call refer to emissions generated from the vessel activities while at berth and vessel movements within that port.
